Common types of mortgage
Standard Variable Mortgage
This is a lenders basic mortgage rate, more often than not this is the rate that a customer reverts to when they are at the end of their fixed, discount or capped rate. The rate itself is set by the lender and although tends not to have an early repayment charge, it is not usually competitive.
Tracker Mortgages
A tracker mortgage quite literally tracks the Bank of England base rate, generally set a certain level above or below, it increases and decreases in conjunction with the base rate. For example if there is a 0.5% rise, the interest rate payments of the mortgage also increase by 0.5%. Although this leads to much uncertainty regarding the mortgage payments, trackers are usually at a lower rate than fixed products, and have the potential to fall even lower should the base rate drop leading to smaller monthly payments.
Fixed Rate Mortgages
Fixed rate mortgages are generally the primary choice for many people, in particular first-time-buyers, as the rate is fixed at certain level of interest for a set period of time. The advantage of this is that irrespective of much the Bank of England base rate fluctuates, your monthly payments will remain the same, so there is no risk of your mortgage costing you more over the set period. Although most popular fixed rates are for two years, they can be fixed for up to 10 years. The downside to a fixed rate is that if the Bank of England base rate drops, the payments will not, so it could mean paying out more than if you were on a tracker mortgage.
Capped Mortgages
This rate may go up and down with the Bank of England base rate, however like the name suggests it is capped at a certain level. This ensures that the mortgage payments will not exceed a certain amount. The capped period does not tend to be for the life of the mortgage so is therefore guaranteed for a limited time only. Although some capped rates do cover the life of the mortgage, they also have a minimum level that they can drop to.
Cash-Back Mortgages
Although usually price higher than most other products, cash-back mortgages allow a lump sum to be paid to the customer (this is usually just after completion). This is particularly attractive to first time buyers who do not have a great deal of money to fall back on. Cash backs can be in the form of a payment towards legal fees and survey costs or even a percentage of the loan, and depending on the amount borrowed this can often equate to a generous lump sum of money.
Buy-to-Let Mortgages
Purely for investment properties, Buy to Let mortgages are usually less attractive than residential rates, however they are calculated differently, so somebody who cannot afford the monthly repayments on a home, can still purchase a property as a future investment. This is possible as buy to let mortgages are calculated differently to a standard residential mortgage. Many lenders will work on a rental calculation that depends on the income received from the property for the affordability assessment. Other lenders will do a combination of both, and some will apply an affordability calculation based on clients' incomes. With some lenders allowing persons as young as 18 years old to obtain a buy to let mortgage, it is a great way for a first time buyer to get onto the property ladder, even if they could not afford the up keep of the entire property. Many first time buyer landlords still live at home with parents while earning rental income on a property they own. There are various types of buy to let mortgages such as fixed, tracker etc.
Flexible Mortgages
More and more people are taking out flexible mortgages, the reason for this is that they offer a number of features that most standard mortgages do not. Some of these features include the ability to make underpayments and unlimited overpayments without incurring any early repayment charges, the option to take a payment holiday, as well as the ability to borrow back previous overpayments. For example, an individual earns a bonus of £7,000, they could choose to pay of a lump sum from their mortgage but what if they then needed the money at some point further down the line. With a conventional mortgage the only way to get it back would be to apply or a further advance, with a flexible mortgage however one could simply request it be transferred back across as simply as transferring money from a savings account. The real advantage of this type of mortgage is that with the ability to make these overpayments, it can be quicker to pay off a mortgage early, and should the need arise to raise some additional money, it is not a problem.
Discount Trackers
Similar to tracker mortgages, however discount trackers offer a discount off a lenders standard variable rate as opposed to the Bank of England base rate. The advantage of this is that even if the base rate goes up, a lender may not increase their rate, or if they do, by less than the base rate increased. Discount tracker mortgages also can be slightly lower than tracker mortgages.
LIBOR Mortgages
LIBOR stands for London Interbank Offered Rate, this is that rate at which banks lend money to other banks. Many lenders borrow money from the Bank of England, which is why most rates work off the Bank of England base rate, some however borrow from other large banks and LIBOR is the rate at which they borrow. LIBOR is almost always higher than the base rate, so LIBOR rates in turn are usually higher than others. These rates can be fixed or variable trackers.